Bank of England Raises Interest Rates for Second Time In A Decade

Author:
Tom Hodson

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Latest News

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The rates have risen by a quarter of a percentage point, from 0.5% to 0.75%, the highest level since March 2009.

This rise is likely to be a welcome sight for savers, following on from the last hike in November. According to experts, around 50% of saving accounts saw an increase in interest rates the last time rates rose, with these people experiencing an increase of around 0.2 percentage points.

With the Financial Conduct Authority (FCA) also suggesting that banks should set a minimum interest rate on savings accounts, savers could be set to start seeing better returns on their money, something that is vital in a time when financial planning for the future has taken a backseat.

In recent studies by SevenCapital and alongside independent research firm Censuswide, we found that 40% of people have zero investments for the future. 45 – 55-year-olds are topping the charts with over 50% of the demographic having no investments.

This is followed by 36% using their ISAs and 18.4% investing in property, a relatively low number considering the importance of preparing for the future and retirement.

While it seems unlikely that UK will be returning to interest rates of 5% – the Bank believes the UK’s natural interest rate for the economy sits somewhere between 2% and 3% – various financial markets are forecasting potentially another two increases of 0.25% by 2020.

On the other side of the fence, increasing interest rates will mean more than 3.5 million residential mortgages on a variable or tracker rate will be affected.

In real term figures, a 0.75% rise on a £150,000 variable mortgage will mean an increase in annual cost by £224.

For investors, borrowing £250,000 over 25 years at 75% LTV will cost £33.35 per month more on a full repayment term. On interest-only terms, this means £52.08 more.

Similarly, £500,000 over 25 years at 75% LTV would mean £66.70 a month more on a full repayment term. For interest-only, this equals £104.17 more.

Why have the interest rates increased?

For financial experts, this news has been expected. After the increase in November 2017, the Bank of England advised that further hikes were being considered.

It should be noted that the BoE have been encouraged to increase rates thanks to positive UK economic data. Despite remaining uncertainty around Brexit, unemployment rates are at their lowest in 42 years.

The Bank continues to expect modest growth of 1.4% this year and 1.8% next year, predicting wage growth increases while inflation will fall back to 2% – their target for 2020.

Household spending has also picked up despite falling retail footfall. BoE believes this represents a shift in demand for online goods and services rather than physical locations.

In terms of Brexit, Mr Carney of the Monetary Policy Committee believes “the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

“Although the range of potential outcomes is wide, what matters for monetary policy is how people react to developments… British households have been resilient – but not indifferent – to Brexit news”.

For those that are looking to start planning for the future, beginning a form of savings could benefit from both this rise and the predicted rises in several years. However, for those with long-term goals of property investment for retirement, it may be the best time to start considering a fixed-rate alternative when looking at mortgage options.